The Hedgeweek Interview: Lars Kroijer, Founder and Portfolio Manager, Holte Capital Limited: The right balance between returns and risks

Lars Kroijer is the Founder and Portfolio Manager of Holte Capital Ltd, a London based hedge fund, which invests in European market neutral special situations. Lars was previously with HBK Investments in London where he focused on special situations investing and event driven arbitrage. He generated market neutral, absolute return investment theses within the European time zones. Prior to that, Lars worked at SC Fundamental, a value investing hedge fund in New York. Prior to attending graduate school, Lars worked in the investment banking division of Lazard Freres in New York. While in graduate school, Lars had brief internships with both McKinsey Consulting and Permira Advisers. Lars graduated from Harvard University in economics (magna cum laude) and obtained an honours degree from Harvard Business School.

HW: What is the background to the fund?

LK: The Holte Capital Fund was launched in November 2002 by Lars Kroijer (PM) and Brian O'Callaghan (COO). The investment manager, Holte Capital Ltd, currently manages approximately USD 200 million.

HW: How and where do you distribute the fund? What is your current and targeted client base?

LK: The fund is distributed globally primarily to institutional clients. Its lack of correlation to markets, currencies, etc. makes it particularly suitable for pension funds or other investors attracted to uncorrelated, absolute returns.

HW: What is the investment process of your fund?

LK: Our investment process begins with idea generation followed by preliminary analysis and then quickly moves into intensive analytical work. The analysis includes significant primary research and direct contact with the companies involved. Once I am satisfied with the conclusions and the quality of the supporting analysis, then we look to structure the trade so that it is hedged to market neutrality.

HW: How do you generate ideas for your fund?

LK: We are fortunate to have nearly every European language covered by our analysts, so that means that we are able to comb the local business press in order to source new ideas and stay on top of existing ones.

We prefer not to rely on broker generated ideas for the simple reason that idea generation is a key element of our edge and utilizing broadly pitched ideas would nullify that.

HW: What is your approach to managing risk?

LK: Although we study many of the standard measures, such as VaR, shock testing and sector concentrations, there are a few areas where we devote particular attention. Market neutrality and absence of correlation are core to the fund's profile and so each trade 'thesis', of which there are typically 25 - 30, is structured to be market neutral, on beta adjusted basis, in its own right and uncorrelated to all of the others. In this way, an uncorrelated, market neutral portfolio is constructed from the bottom up. The other critical area in our view is liquidity. We carefully monitor our position sizes in terms of days' median volume, particularly on the short side, to ensure that we are never seriously caught out by a sudden stock loan recall.

HW: How/against what do you benchmark the performance of your fund?

LK: Because one of our fundamental aims is to be uncorrelated to other funds, markets, currencies, interest rates, etc., we do not use a specific performance benchmark.

HW: Has your performance been as per budget and expectations? Do you expect your performance or style to change going forward?

LK: On a risk-adjusted basis, we feel that our returns have been very strong. Where we feel we could have done better was setting the appropriate risk levels. The fund is a relatively conservative product but we feel that in the past we may have been too conservative. That is no longer an issue and we feel that our current profile delivers the right balance between the returns and risk levels, while aiming for market neutrality and freedom from correlation. Over the past year (LTM), the fund has exceeded our annual target of 10% net.

HW: What opportunities are you looking at right now?

LK: We are currently seeing more opportunities than we have time to analyse. Recent market turmoil has provided incentive to look at some non-directional relative value trades in sectors like shipping and oil rigs and they are looking particularly interesting.

HW: What events do you expect to see in your sector in the year ahead?

LK: One of the benefits of being engaged in a strategy such as ours is that we do not have to be overly concerned with any particular environment. So long as there exists mispriced complexity, whether in security issues, corporate structures or situations, we will have investment opportunities.

HW: How will these changes/future events impact on your own portfolio?

LK: N/A (see above)

HW: What differentiates you from other managers in your sector?
LK: We combine event analysis and fundamental value analysis in a way that makes us quite unusual. The core strategy is to focus on 'residual value investing,' where the synthesis of fundamental value and event-driven analysis of complex corporate structures or situations enables us to profitably isolate and hedge core residual businesses that have been implicitly mispriced by the market.

HW: Do you have any plans for similar/other product launches in the near future?

LK: Our approach would lend itself well to similar situations in other geographic regions, such as Asia. However, there is currently far too much to keep us busy within our current space to be able to turn attention elsewhere anytime soon. Consequently, we have no imminent plans for new product launches.

(Lars Kroijer was interviewed on 15 May 2006; the interview was revised on 31 May 2006)